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How Being a 401k Fiduciary is Like Being a Parent and How it's Not

| February 04, 2020
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Kids...

I have 2 kids, a little boy and girl. They have complete trust in me. When they woke up this morning, they didn't have to wonder if me or my wife were going to take care of them today. They didn't have to worry about having food or clothing; It’s just there for them. It’s my responsibility and privilege to put their needs first. There are decisions that I must make for them. I must decide to get them to school, not let them play with knives, etc. Their health and safety are placed above my own. The relationship I have with them is like that of a 401k plan fiduciary.

The word Fiduciary comes from the Latin word Fiducia which means trust. Making decisions regarding your company’s retirement plan is a matter of trust. Employees depend on you to make decisions in behalf of them. Even when they are deciding on their own investments, your decisions may influence the fees they pay, the investment options that are available, the assistance they receive in making retirement related decisions, etc.

The DOL's Definition of a Fiduciary

The way the Department of Labor puts it is:   

  “The Employee Retirement Income Security Act (ERISA) protects your plan's assets by requiring that those persons or entities who exercise discretionary control or authority over plan management or plan assets, anyone with discretionary authority or responsibility for the administration of a plan, or anyone who provides investment advice to a plan for compensation or has any authority or responsibility to do so are subject to fiduciary responsibilities.”

If you think about it, when you read the DOL's definition, they don't just say, "if someone says you are a fiduciary, then you are a fiduciary to the plan." Instead they are basically saying that if it walks like a duck and sounds like a duck, it's probably a duck. 

Two types of Fiduciaries

There are two common types of fiduciaries:

Named – They show up in the plan documents or specified by a procedure outlined in the plan docs. It's important to review these documents periodically. I have come across all kinds of situations. For example, you don't want to find out that your assistant is the one who is the named fiduciary in the plan documents and that you, the owner or HR professional don't have signing power on the plan.   

Functional – Much of what is in the quote from the DOL signifies functional fiduciaries.This is why we tend to tell people who are not named fiduciaries in the plan but end up “touching the plan” not to engage in activities that look like fiduciary activities. If you look like a fiduciary, you may be considered one, even if you don’t intend to be one. 

Why is this all important?

Just like being a parent, a 401k plan fiduciary can be liable for the actions or lack of actions they have on a plan. One of the most common misunderstandings I see plan Sponsors have is they think the record-keeper is the fiduciary of the plan. If you are a parent and decide to put your own interests above that of your kids and it is at the expense of the kids health and safety, you may get in serious trouble. If you are a 401k plan fiduciary and you put your own benefit ahead of that of the plan and its beneficiaries, you can be personally liable for your breach of fiduciary duties.   

Bibliography

LABOR, U. D. (n.d.). Fiduciary Responsibilities. Retrieved from U.S. DEPARTMENT OF LABOR: https://www.dol.gov/general/topic/retirement/fiduciaryresp

 

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